In defense of doom and gloom in an oil-price bet

Unless the price of oil magically surges to $52,831 per barrel on December 31, New York Times columnist John Tierney and Rita Simon, the widow of the economist Julian L. Simon, will collect on a $5,000 bet placed in 2005. As Tierney describes in his entertaining column this past Tuesday, he wagered economist Matthew R. Simmons that the average price of crude would not top $200 a barrel in 2010. As Tierney relates, the 2010 average is so far just under $80, about $71 in 2005 dollars.

Simmons was relying on the "peak oil" argument, which suggests that global production is on the decline. Tierney got the great idea to publicly bet Simmons--an homage to his friend Julian Simon, who won a similar kind of bet against Paul Ehrlich, the ecologist who decades ago predicted Malthusian famine because of overpopulation. Simon and Ehrlich wagered on the commodity prices of five metals, and Simon, a glass-half-full kind of guy, won over Ehrlich's gloomy, rising-price prediction.

Tierney basically presents the bets as the glee club against the Goths. He writes: "As the leader of the Cornucopians, the optimists who believed there would always be abundant supplies of energy and other resources, Julian figured that betting was the best way to make his point. Optimism, he found, didn’t make for cover stories and front-page headlines."

Let me first address the media aspect of this observation. Simon was referring to the (cynical) dictum, "Good news is no news, and bad news is big news." Let's face it: you wouldn't plunk down $1 for a newspaper if the headlines read "Everything Is Just Fine" and "Nothing Happened Today." We expect our lives to move along generally predictable routes, and we turn to various media sources to learn of events that could change our routines.

But put aside that practical (and mercenary) reason of news coverage for a moment, and imagine a Cornucopian headline like "Wells Gush, Plenty of Oil for Foreseeable Future." What are we supposed to take from that information? Should we party like it's 1999, when gas was $1.14 a gallon? Unless the news is truly revolutionary, Cornucopian feel-goodism can add to complacency and inertia: everything's just fine, go about your business.

It isn't that journalists favor bad news--we favor surprising news. Happy, Simonized coverage would work just as well for an editor if the status quo were chronic shortages and high prices.

Now let me address the actual content of the Cornucopian position, at least from a reductionist point of view. (I'll ignore the environmental harm from fossil fuels, which pretty much renders the Cornucopian position irrelevant — it doesn't matter how much oil is left if burning it causes global warming and requires us to develop clean sources of energy.)

In peak-oil debates, Cornucopians cite improving technology that will extract fossil fuels more economically. New deposits will be found; new methods will retrieve more from existing reserves; new ways will emerge to affordably process less-than-sweet crude, such as Canada's tar sands.

But how far can we take such optimism? We all have faith that technology gets better, based on past experience. But does that belief justify policy decisions that affect lives years and decades from now? If the world today lived as if fossil fuels were abundant and affordable, would we bother conserving energy or investing in solar and other renewable sources? And if we chose the partying route, and our abiding faith in technology turns out to be wrong, what then? Will we have burned through our supplies and painted ourselves into an energy corner? The odds that we have hit peak oil may be low, but the consequences are huge if we don't pay attention to that risk.

Tierney concludes that "Julian Simon’s advice remains as good as ever. You can always make news with doomsday predictions, but you can usually make money betting against them." Maybe so, but if you want to form sensible, long-term policies, then you're better off somewhere in between, where you can hedge your bet.

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